FSRC - Financial System Research Center

• Uncovered Return Parity: Equity Returns and Currency Returns

  Staff Working Paper 2018-22 Edouard Djeutem, Geoffrey R. Dunbar

  We propose an uncovered expected returns parity (URP) condition for the bilateral spot exchange rate. URP implies that unilateral exchange rate equations are misspecified and that equity returns also affect exchange rates. Fama regressions provide evidence that URP is statistically preferred to uncovered interest rate parity (UIP) for nominal bilateral exchange rates between the US dollar and six countries (Australia, Canada, Japan, Norway, Switzerland and the UK) at the monthly frequency.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Exchange rates, International financial markets JEL Code(s): E, E4, E43, F, F3, F31, G, G1, G15

• Analysis of Asymmetric GARCH Volatility Models with Applications to Margin Measurement

  Staff Working Paper 2018-21 Elena Goldman, Xiangjin Shen

  We explore properties of asymmetric generalized autoregressive conditional heteroscedasticity (GARCH) models in the threshold GARCH (GTARCH) family and propose a more general Spline-GTARCH model, which captures high-frequency return volatility, low-frequency macroeconomic volatility as well as an asymmetric response to past negative news in both autoregressive conditional heteroscedasticity (ARCH) and GARCH terms.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Payment clearing and settlement systems JEL Code(s): C, C5, C58, G, G1, G19, G2, G23, G28

• The (Un)Demand for Money in Canada

  Staff Working Paper 2018-20 Casey Jones, Geoffrey R. Dunbar

  A novel dataset from the Bank of Canada is used to estimate the deposit functions for banknotes in Canada for three denominations: $1,000, $100 and $50. The broad flavour of the empirical findings is that denominations are different monies, and the structural estimates identify the underlying sources of the non-neutrality.

  Content Type(s): Staff research, Staff working papers Topic(s): Bank notes, Econometric and statistical methods JEL Code(s): C, C3, C31, C36, E, E4, E41

• The Share of Systematic Variations in the Canadian Dollar—Part III

  Staff Analytical Note 2018-13 Guillaume Nolin, James Kyeong, Jean-Sébastien Fontaine

  We draw a parallel between the dramatic increases of systematic variations in exchange rates and international bank lending. We find that when a country’s currency has a larger share of systematic variations, lending flows by international banks to that country become more sensitive to global lending - they also become more systematic. This parallel is particularly prevalent for large commodity exporters, including Canada. Global financial intermediation may open a new channel between the real economy and exchange rates.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Exchange rates JEL Code(s): F, F3, F31

• Customer Liquidity Provision in Canadian Bond Markets

  Staff Analytical Note 2018-12 Corey Garriott, Jesse Johal

  This analytical note assesses the prevalence of liquidity provision by institutional investors in Canadian bonds. We find that the practice is not prevalent in Canada. Customer liquidity provision is more prevalent for less liquid bonds, on days when liquidity is already expensive or when there are larger trading volumes. In our interpretation, Canadian dealers draw on customer liquidity as a supplementary source of liquidity and only when necessary, given its cost.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial institutions, Financial markets, Financial system regulation and policies, Market structure and pricing, Recent economic and financial developments JEL Code(s): G, G1, G14, G2, G20, L, L1

• Housing Price Network Effects from Public Transit Investment: Evidence from Vancouver

  Staff Working Paper 2018-18 Alex Chernoff, Andrea Craig

  In this paper, we estimate the effect on housing prices of the expansion of the Vancouver SkyTrain rapid transit network during the period 2001–11. We extend the canonical residential sorting equilibrium framework to include commuting time in the household utility function.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Economic models, Housing JEL Code(s): H, H4, H41, R, R2, R21, R4, R41

• How to Manage Macroeconomic and Financial Stability Risks: A New Framework

  Staff Analytical Note 2018-11 Alexander Ueberfeldt, Thibaut Duprey

  Financial system vulnerabilities increase the downside risk to future GDP growth. Macroprudential tightening significantly reduces financial stability risks associated with vulnerabilities. Monetary policy faces a trade-off between financial stability and macroeconomic risks.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Central bank research, Economic models, Financial stability, Financial system regulation and policies, Interest rates, Monetary policy, Monetary policy framework JEL Code(s): E, E4, E44, E5, E52, E58, G, G0, G01

• A Policy Framework for E-Money: A Report on Bank of Canada Research

  Staff Discussion Paper 2018-5 Mohammad Davoodalhosseini, Francisco Rivadeneyra

  We present a policy framework for electronic money and payments. The framework poses a set of positive questions related to the areas of responsibility of central banks: payments systems, monetary policy and financial stability. The questions are posed to four broad forms of e-money: privately or publicly issued, and with centralized or decentralized verification of transactions. This framework is intended to help evaluate the trade-offs that central banks face in the decision to issue new forms of e-money.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Digital currencies and fintech, Monetary policy, Payment clearing and settlement systems JEL Code(s): E, E4, E41, E5, E51, E52, E58

• Personal Experiences and House Price Expectations: Evidence from the Canadian Survey of Consumer Expectations

  Staff Analytical Note 2018-8 Mikael Khan, Matthieu Verstraete

  In this work, we use novel Canadian survey data to study how expectations of future changes in house prices are influenced by personal experiences. We find that recently experienced changes in local house prices are routinely extrapolated into expectations of year-ahead changes in national house prices.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial stability, Housing

• Order Flow Segmentation, Liquidity and Price Discovery: The Role of Latency Delays

  Staff Working Paper 2018-16 Michael Brolley, David Cimon

  Latency delays—known as “speed bumps”—are an intentional slowing of order flow by exchanges. Supporters contend that delays protect market makers from high-frequency arbitrage, while opponents warn that delays promote “quote fading” by market makers. We construct a model of informed trading in a fragmented market, where one market operates a conventional order book and the other imposes a latency delay on market orders.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial system regulation and policies, Market structure and pricing JEL Code(s): G, G1, G14, G18